The $13.6M Tax Exemption: Use It Before Your Clients Lose It

Key Takeaways:

• The Tax Cuts and Jobs Act delivered a sizable increase in the tax exemption limit for estates and lifetime gifts—up to $13.61 million per person in 2024.
• this opportunity could go away in 2026 if the exemption is allowed to sunset.
• Anyone with an estate or lifetime gifting that exceeds the cap in 2026 could end up owing a 40% tax on the amount over the limit.

The biggest-ever federal tax exemption for estates and gifts sunsets at the end of 2025, which presents an opportunity for your clients to make the most of the current exemption limit. The Tax Cuts and Jobs Act (TCJA) delivered a sizable increase in the tax exemption limit for estates and lifetime gifts—up to $13.61 million per person in 2024. However, this opportunity could go away on January 1, 2026, if the exemption is allowed to sunset. Without any changes to the law, the estate and lifetime gift tax exemption will plummet to $5 million per person (with an adjustment for inflation) on January 1, 2026.

Anyone with an estate or lifetime gifting that exceeds the significantly reduced exemption cap in 2026 could end up owing a 40% tax on the amount over the limit. Now is the time to help clients make the most of the current exemption limit—such as through additional gifting, a trust, or another strategy.

How to help clients plan ahead

Talk with your clients now about ways to make the most of the historically high exemption limits while they last. Potential strategies include:

• Annual gifting: Use the annual gift tax exclusion to its fullest. For example, an individual can gift up to $18,000 in 2024 without incurring a gift tax. Married couples can gift a combined $36,000 in 2024.
• Family limited partnership (FLP) or family limited liability company (LLC): These entities allow parents to transfer wealth to their children while still retaining control over the transferred assets. FLPs and LLCs can offer significant valuation discounts, reducing the value of the taxable estate.
• Charitable remainder trust (CRT): Assets can be placed into a CRT and then generate an income stream for a certain period of time. After this period, the remaining assets go to a charitable organization. This strategy reduces a taxable estate and provides tax advantages and income during the client’s lifetime.
• Irrevocable life insurance trust (ILIT): An ILIT holds a life insurance policy outside of an estate. Upon the insured’s death, the proceeds from the policy are paid into the trust—and aren’t subject to estate taxes.
• Grantor retained annuity trust (GRAT): With a GRAT, assets are transferred into a trust, which then generates an annuity payment for a set period. After that period, the remaining assets pass to the trust beneficiaries, often with little or no estate tax.
• Qualified personal residence trust (QPRT): A QPRT allows individuals to transfer their primary residence or vacation home to an irrevocable trust—while retaining the right to live in it for a certain period. After this period, the residence passes to the trust beneficiaries.

Don’t forget about states with estate taxes

Many states have their own separate estate tax laws. Clients who are residents of those states likely need separate strategies to minimize the state-specific estate taxes.

Encourage clients to act now

It’s possible that new legislation could extend the estate and gift tax exemption. But there’s certainly no guarantee—and clients who decide to wait it out may lose a once-in-a-lifetime opportunity to save on estate taxes. By educating clients on this upcoming change, you’ll do them a tremendous service and give them yet another reason to continue working with you in the years to come.